Transcript of a Press Conference Call with IMF Resident Representative for Sri Lanka, Koshy MathaiOn the Completion of the IMF’s First Review Under Sri Lanka’s Stand-By Arrangement
Colombo, Sri Lanka, Monday, November 9, 2009
MR. MATHAI: Let me discuss a little bit of background. As you all know, the IMF Executive Board approved a Stand-By Arrangement with Sri Lanka of about US$2.6 billion back in July. And as is the case for all IMF programs, not all of the money was to be disbursed at once, but rather it was split into eight different tranches of close to US$330 million each. The first tranche was disbursed upon program approval in July and the other tranches were to be linked with quarterly reviews of macroeconomic performance and development.
A team from Washington visited Colombo in September and came to the assessment that macroeconomic developments and policy performance were all strong and that policy commitments going forward were also in line with the program. Staff thus recommended completion of the first review of the program to our Executive Board, made up of representatives of the countries that are members of the IMF.
They considered the first review on Friday [November 6] and agreed with the staff assessment, completing the review. That paved the way for disbursement of the second tranche, which should happen very shortly—within a day or two, I think.
In July, when the program was approved, we had a conference call with the media to answer questions, and we thought we’d repeat that now. We’ve had a lot of interest from journalists not only here in Colombo, but also elsewhere, so we thought we’d do it once again via telephone to permit everybody to participate on equal footing.
I should also mention that Brian Aitken, who is Mission Chief for Sri Lanka, and who conducted the conference call in July, is unable to join us since he and the team are en route to Colombo as we speak, in order to start discussions on the second review.
I think we have about 30 minutes, and I welcome any questions you may have for me.
QUESTIONER: The IMF has acknowledged now in response to the letter by the government on October 30 that—about the vote-on-account and also that elections will be held in the first quarter of next year. And also the letter from the government says that after the elections are held the fiscal targets that have been announced will be maintained for 2010 and 2011. My question is that in case there is a new government or another party that comes into power, how can those commitments be maintained? Will the IMF in such a case renegotiate or re-discuss these issues with the new party in power?
MR. MATHAI: That’s a very reasonable question, and it’s one that comes up not just with Sri Lanka, but in any country that’s facing elections. The best that we can do is to talk to the government that currently is in power, and they have had strong performance so far. And they have indicated their strong commitment to keeping fiscal discipline going forward. All that we can do is that.
If the situation changes going forward, if there’s a new party in power, if there’s a new administration, then we will, of course, discuss their views on the economy with them. But for now, we have the current administration’s assurance that policy commitments on the fiscal front and on other fronts are in line with what they said they would be when the program was approved.
QUESTIONER: And my question is the second conference (inaudible) October, but by (inaudible) one month (inaudible).
MR. MATHAI: You’re right that initially we were thinking of going to the Board at the end of October. Any review has both a retrospective part and a prospective part. The one part is looking at whether performance against the quantitative and qualitative targets of the program has been aligned with what the program says. The other is looking forward to see whether policy commitments remain in line with what the government said earlier (inaudible).
When the vote-on-account came up as an issue, basically it took up little time to understand what the implications of that development were for the fiscal situation next year. And after discussing it with the government, we came to the understanding that this is an interim budget that covers the first few months of the year. It’s meant to restrict expenditures to a prorated version of the approved estimates for the previous year, which is good for fiscal discipline. It helps to prevent any election spending pressures. But it also, of course, delays any introduction of structural fiscal reforms that may be necessary.
We had to look at the numbers. And our assessment of the numbers was that while it’s impossible with a four-month plan to decide for certain what it implies for an entire 12-month period, we did come to the view that the four-month plan was at least not inconsistent with the 6 percent deficit target that the government had outlined in their Letter of Intent. And on that basis, we thought we would move forward with the review. It took us a little time to come to this understanding and that’s why we delayed the board meeting by just a few days.
QUESTIONER: I would like to (inaudible) second installment for the (inaudible) first review was delayed and (inaudible) installment was delayed. So does this have any implication on the second review and the third installment or will it go ahead as preplanned for the earlier days?
MR. MATHAI: Yes, this also is a topic that comes up in all IMF programs, the phasing of reviews. And I think there’s no substantive implication here for the timing going forward.
QUESTIONER: I just wondered now in your review, you say, the [Executive Board] granted Sri Lanka (inaudible) a waiver of the September 2009 performance criterion on net domestic financing (inaudible), which basically means the government finance has not met according to the limit. Based on that, do you think Sri Lanka will be able to go for 7 percent deficit this year? And will you be flexible on that target?
MR. MATHAI: Let me clear up a misunderstanding here. And it’s actually something that took me several years of working at the IMF before I understood it, so I don’t fault anybody for not following it!
We have two types of waivers at the IMF. One is a waiver of non-observance. That’s when a target is actually missed. And if a target is missed, but we are convinced that there has been some corrective action and that policy intentions going forward are strong, well, then we say, okay, we can give a waiver of non-observance, and we move forward with the program.
The other kind of waiver is what happened for the September target, and that’s called a waiver of applicability. It means basically that all the data necessary to assess the target were not available to us. We did, however, think on the basis of what data was available that they are likely to meet the target, but we cannot confirm it because all the data are not available. Therefore, we have to request a formal instrument of a waiver of applicability, but it does not mean that the target was missed. Rather we have incomplete data, but right now there’s no data indicating that the target has been missed.
As far as your broader question about the 7 percent target, the government obviously recognizes that this is a difficult target to meet. But they have assured us that they are doing their best and, of course, this is going to be -- (inaudible) a new picture going forward and we’ll just have to see what happens. That will be an issue for a future review.
QUESTIONER: Can you give us the IMF’s assessment of the (inaudible) performance (inaudible) the policy of the government?
MR. MATHAI: In terms of macroeconomic policy, which is the area we focus on, their performance (inaudible) is in line with the program. That’s why we went ahead and recommended completion of the review.
QUESTIONER: What is your view on Sri Lanka’s exchange rate policy?
MR. MATHAI: I think saying something definitive about an exchange rate, about the level of a currency and about the type of policy that’s being followed is difficult in any country. And making predictions about short-term movements in currencies is nigh-on impossible, so we try to avoid that.
What we think is that the government has conducted a sensible policy up to now. We’ve had a surge of capital inflows coming in over the past few months, what with the end of the war and perhaps some additional confidence associated with the approval of the program. And, in fact, there has been a lot of pressure on the rupee to appreciate. The Central Bank has been intervening, i.e., accumulating reserves, to prevent an appreciation, which they are not in favor of, while, at the same time, building their war chest of reserves to handle any future needs. We think it’s a sensible policy and we look forward to discussing it further with them.
QUESTIONER: Any plans for an IMF office in Sri Lanka?
MR. MATHAI: Well, I myself am indeed the IMF Office in Sri Lanka! Usually when a country borrows from the IMF, the Fund posts a person in that country, basically to keep the channel of communication open with the government and to speak more broadly with other stakeholders so that we get a good picture of what’s happening in the country.
Unlike other international organizations and embassies, we usually have a small footprint, just one economist or two economists with some support staff and that’s what we’ve done here as well. I arrived about a month ago and I’m just settling into the job.
QUESTIONER: The (inaudible) on the government to increase salaries. And the government has said that they will increase the (inaudible), but that they will increase salaries from January. Now, that’s not in the (inaudible) it’s certainly true (inaudible) that how will the government pay for this.
Now, your second review mission which (inaudible) here will they look into these issues?
MR. MATHAI: Certainly we will look into all issues. I think on this (inaudible) and certainly fiscal issues are very important to the program. And I’m sure the team will be discussing them.
On this issue of the pay hikes, the details of the announcement are not even absolutely clear within the government itself. So we ourselves don’t yet have an assessment of what the impact would be on the budget, but we certainly look forward to discussing it with the government.
What I can say right now is that the government has not indicated any deviation from the fiscal targets they have set for themselves in the program.
QUESTIONER: The IMF says that fundamental external adjustment is still necessary. Can you tell me what this means?
MR. MATHAI: Basically what we’re getting at here is we’re trying to sound a note of caution. There have been extremely favorable developments over the past few months, as you know, with respect to capital inflows. Money has just rolled right in. And the Central Bank’s reserve position has swelled to an extremely comfortable position. It has swelled so much that now the Central Bank has to figure out what to do with all these reserves.
There is a difference in our minds, though, between reserves that are borrowed, that is reserves like these which are coming in from foreign investors, and reserves that are borne of current account adjustment. You see, money that is borrowed is very useful. It boosts reserves and gives the Central Bank flexibility in the short run. But there’s always the risk that that money could flow out if international investors change their minds.
I don’t want to overemphasize that aspect here because a lot of the money has actually gone into longer maturity treasury bonds. And the secondary market here is sufficiently illiquid that it’s not easy for investors to unwind their positions quickly and take their money out. So while people in other countries may talk about “hot” money flowing in, I think in this case it may be more relevant to talk about “lukewarm” money at most.
That said, there is still a difference between borrowed money and money that comes from exports booming. And that sort of adjustment I think still needs to take place. The IMF program tries to make adjustments for these borrowed reserves and we adjust upward our reserve targets when we see these borrowed reserves coming in. Even the adjusted targets have been easily met since remittances have been very strong. But we have noticed in past episodes that rising remittances have, with some months’ lag , been followed by rising imports, which tends to sap reserves. That’s why we continue to focus on reserve build-up as an important part of the program.
QUESTIONER: In terms of the Central Bank buying the gold (inaudible)?
MR. MATHAI: That’s right. The IMF has as part of our new income model—we used to rely solely on the interest charged on loans to finance our operations. And there was a Committee of Eminent Persons chaired by Sir Andrew Crockett that devised a new strategy for funding the IMF, part of which relied on selling a limited part, about one-eighth, of our gold holdings. That translated to 400.3 million tons. Two hundred million tons have been purchased by India, and I believe that Sri Lanka’s government also is buying a limited amount. Obviously much smaller since Sri Lanka is a smaller country.
Sri Lanka right now is enjoying the benefit of a large amount of international reserves. And when one has a large portfolio there’s always an issue how best to diversify that portfolio. The government evidently has come to a decision that it’s useful to diversify to gold and that’s basically something that’s for them to decide. We, of course, will discuss it with them.
QUESTIONER: Is Sri Lanka buying a part of the gold that IMF will be selling? This is an open market question?
MR. MATHAI: I’m sorry, I didn’t hear your question.
QUESTIONER: Yeah. I wanted to know, as you mentioned, that Sri Lanka is also buying a bit of gold. So would this be part of the IMF 400 tons that IMF would be selling (inaudible)?
MR. MATHAI: Well, I think this is really tough to tell. There is an interest in the market for gold. We are selling; other people are buying. Saying that this gold is going from this particular source to that particular destination is almost impossible to tell.
QUESTIONER: I just wanted to review also on Sri Lanka (inaudible) and the overseas (inaudible) bond markets. Do you see that as a good option?
MR. MATHAI: Well, they did float a $500 million Eurobond and, as you know, the interest rate on that was 7.4 percent, which even with the decline in domestic borrowing rates is still cheaper, so that’s good. And it’s also good that they tried to diversify their funding sources and also good that they’re able to borrow at the five-year term. It was a five-year Eurobond, so they were able to lengthen the maturity structure of the debt. All these are good things.
Added to it is the fact that it sends a signal to the international market that Sri Lanka is back on the scene and that it’s a good destination for investment. And the heavy over-subscription of this Eurobond shows, I think, that international investors agree.
QUESTIONER: The Executive Board also (inaudible) requests for available (inaudible) domestic financials. Could you tell me what (inaudible)?
MR. MATHAI: Well, let me answer that just very briefly because there was another question on this slightly earlier. The waiver of applicability basically means that all the data to assess the September target were not available right now. So we had to ask the Board to waive the applicability of that target for this review. We would not have asked for such a waiver, however, if we didn’t feel confident that the existing data showed that they were likely to meet the target. We can’t say for certain because we don’t have all the data, but the existing data are consistent with the target’s being met.
QUESTIONER: What is the timing for the disbursement of the next tranche?
MR. MATHAI: The timing of the next tranche is not absolutely sure. The team is arriving this week itself to conduct discussions [of the second review]. After they prepare a report and submit it to the Board, then the Board would, as they’ve just done this Friday, be in a position to consider the second review, which would be associated with the third tranche. So that should happen relatively soon.
We do have a 20-month program with Sri Lanka that expires in early to mid-2011. And there are to be seven reviews. You can imagine that they’re not spread very far apart.
QUESTIONER: You stated earlier that you’re focusing on getting Sri Lanka to increase the long-term reserve build-up rather than the short-term foreign reserve (inaudible) that is coming in. How much of an effect will this have on the next installment that the IMF is supposed to give to Sri Lanka?
MR. MATHAI: I can answer you in general by saying that the IMF program has three main quantitative targets: one is on fiscal; one is on monetary policy, reserve money; and the third is on international reserves. And the reserve target that we have, as I mentioned earlier in the call, doesn’t look just at headline reserves, the numbers that we see in the newspapers, but it tries to adjust away for all of those external flows. We try to look at the core of international reserves.
So far, the government has performed well even against these adjusted targets, and we expect and hope that that will continue to be the case going forward.
QUESTIONER: (inaudible) very sorry, but (inaudible) the answer for (inaudible).
MR. MATHAI: Ah, right. So let me say it again and I hope you won’t get too bored by the half that you already heard. The answer is basically that the IMF program has three main quantitative targets: one on fiscal, one on monetary, and one on international reserve build-up. The international reserves target is adjusted for these flows, these borrowed funds going into the treasury market, Eurobonds, things like that. So what we try to do is we have targets that look at underlying reserves, sort of reserves that are generated by Sri Lanka itself. Even those targets have been met so far and we expect and hope that they will continue to be in the future.
QUESTIONER: On that basis of having missed August targets (inaudible), how is it you are able to complete the review?
MR. MATHAI: I’m not quite sure I agree with the premise that they have missed targets.
QUESTIONER: It’s very simple. You basically take, what do you call it, their expenses, the government expenditures, you deduct income. And you divide it (inaudible).
MR. MATHAI: I think it’s simple, but perhaps it’s too simple. There have been trends in fiscal that vary from month to month. This has been an exceptional year. I think the period after May has been dramatically different from the period before May. And I’m not suggesting that all the difficulties are over.
The Sri Lankan economy has perhaps charted its most difficult waters, but it’s not back to harbor yet. The global environment, first of all, is not yet fully supportive. We at the IMF have a prediction for global growth of only slightly over 3 percent. It’s 3.2 percent for next year, which is substantially below what it was before the crisis. So I don’t want to suggest that everything is happy and that the environment is very supportive and that things are going to be easy (inaudible).
But what I do think is that the second half of the year is quite different from the first half. And one can’t simply extrapolate from the first half’s performance to make projections of what’s going to happen for the year as a whole.
QUESTIONER: But in the performance of the second half, we already have two months’ data.
MR. MATHAI: That’s true. Two months have gone and as you know, developments have been improving but slower than some people might have expected. We just have to wait and see.
QUESTIONER: Do you expect the government to maintain the fiscal targets?
MR. MATHAI: Our best assessment is that they will be on target. This is what the government has committed to. They have shown their discipline so far. They have shown their serious policy intent so far in meeting targets. We have no reason to doubt their commitment going forward.
Now, of course, this is all dependent on the revenue picture. If revenues don’t materialize, then whatever the commitment of the government, they will miss targets. But we don’t expect that to happen. We expect very much that revenues will start picking up even more than they have so far and that the targets will be within reach.
On expenditures, certainly, they have more control over that and they have shown discipline.
QUESTIONER: They have been given salary increases two or three months (inaudible) for this year and next year. Now, with the program requiring salaries to be frozen, what will you make of a rate hike (inaudible).
MR. MATHAI: Actually there is no condition in the program requiring a freezing of salaries. But certainly salaries are an important part of government spending, and we would have to discuss with the government their policy plans as we go forward because it could have an impact on the overall fiscal position.
QUESTIONER: Could you just explain what other fundamental risks you have seen during the past few months?
MR. MATHAI: One thing to mention is the fiscal situation. Sri Lanka is still a country with a high debt stock. Having a high debt stock is fundamentally not conducive to good economic management. The fiscal deficit, that is – the flow, or the rate at which the debt stock is added to—is also still quite high. The government is committed to bringing it down quite sharply; that’s excellent. But the fiscal position all told is an area which remains an area of risk.
The second area is international [reserves]. Reserves are very high, but there remains room for accumulating more reserves. And, as I said, not borrowed reserves, but reserves that are generated from the current account—trade account adjustment. These are two major areas.
MR. MATHAI: I think all the conditions for the IMF program are laid out in great detail in the Letter of Intent. There are no agreements anywhere else except in this document, which was made public on the program approval. A revised Letter of Intent, accompanied by a Technical Memorandum of Understanding, which, as the name suggests, is highly technical and goes into all sorts of detail. These documents were posted on both our website and the Central Bank website, so I think I would refer you to that to look at precisely what the conditions of the facility were.
MR. MATHAI: This is another question that frequently comes up and I’m happy to have the opportunity to add my further point of clarification, which is that IMF money does not go to finance any government spending. IMF money goes straight to the Central Bank in Sri Lanka in order to bolster international reserves. Those reserves are being used to pay Sri Lanka’s international creditors for debt that has been incurred and, most importantly, to finance the imports that Sri Lanka as an island nation is so dependent on.
So to clarify, IMF money does not go to the government. It goes to the Central Bank. And, in fact, when we lend to a country, we do these things called safeguards assessments, where we send a team of accountants and auditors from our headquarters to the central bank of the borrowing country in order to assess that systems are well developed and that there’s no possibility that the money would go anywhere except to stay in reserves and be used for those sorts of purposes.
QUESTIONER: Just one final question. You spoke about that you expect the government to (inaudible) the GDP. What happens if the government misses its targets(inaudible) this time in December? And then afterwards, after the elections, (inaudible) they do not mean to start it. What happens then?
MR. MATHAI: These are really speculative questions and I don’t want to enter the realm of speculation. But I’ll make a general comment, which is that part of the reason why IMF programs are designed as they are, where they are quarterly reviews, is precisely so that we can keep an ongoing dialogue with the government to discuss challenges that they’re facing as we continue to disburse money. So we look forward to continuing that dialogue with the government.
MR. MATHAI: Thank you. Maybe we should take—the time has actually run over a little. We’ll see if there’s one last question and then we’ll call it (inaudible).
QUESTIONER: What sort of interest are you looking at in terms of tax [reforms] for next year (inaudible)?
MR. MATHAI: That’s something that has to be considered in the context of the overall budget. And as you know, we’re not yet looking at an overall 12-month budget. So when the time comes, we will consider that.
I should make very clear that the tax reforms that the government is talking about are tax reforms that would not increase rates, but rather would broaden the base so that rates could be applicable to a broader base and revenues could be raised. And that seems to us a very sensible way of doing things. We look forward to talking with the government more about this as they formulate their plans for the year as a whole.
Thank you very much to all of you for participating.